Bahrain central bank to foster capital markets

Manama, November 21, 2012

Bahrain's central bank (CBB) plans steps to encourage securities issuance and lure foreign investors who have been deterred by the global financial crisis and political unrest in the Gulf island kingdom.

The CBB will soon issue a directive on the offering of securities covering both Islamic and conventional paper, governor Rasheed al-Maraj said in an emailed interview, part of the Reuters Middle East Investment Summit.

"This initiative will encourage foreign investors to use Bahrain as a base for their capital market activities," he said.

Bahrain, a regional financial hub and a major centre for Islamic finance, has been hit by unrest that followed Arab Spring uprisings elsewhere in the Middle East.

Assets of Bahrain's banking system totalled $201.1 billion in September, barely changed from a year earlier and down from $222.2 billion at the end of 2010, before the unrest erupted, according to central bank data.

Investment in Bahraini mutual funds declined to $8.24 billion in the second quarter of this year from $9.17 billion in the first quarter; down 9 per cent so far this year, Bahrain's stock market is the worst-performing among the wealthy Gulf oil exporters.

CBB's plan to issue a directive suggests it has identified regulation as a way to combat difficult capital market conditions.

Maraj said the directive would cover both debt and equity markets, and would involve licensing procedures required by the central bank. He did not give details.

Islamic finance is an area where Bahrain may still have a competitive advantage; the Accounting and Auditing Organisation for Islamic Financial Institutions, a body which sets standards for the industry globally, is based in Bahrain.

The CBB last month issued rules requiring Islamic banks to disclose more about their charges and the profit rates which they offer to depositors, Maraj said.

He also said the CBB had released a consultation paper in preparation for strengthening risk management standards for Islamic banks. The final version of the paper is expected to be issued by January 2013, he said.

A Reuters poll of analysts in September predicted Bahrain's economy would grow 2.8 per cent this year, the slowest rate among the wealthy Gulf oil exporters.

Growth has been supported by heavy government spending but this has pushed the state budget into deficit, and a draft budget released by the Finance Ministry this month indicated Bahrain would cut its budget spending by almost 6 per cent in 2013.

But Maraj said the CBB did not expect to change interest rates to compensate for any reduction in fiscal stimulus, given strong liquidity in retail banks and growth in credit and money supply.

He also said the CBB was satisfied that commercial bank balance sheets were healthy, citing the level of loan to deposit ratio remaining at 75 per cent in the last few years.

Ultimately, the health of Bahrain's economy will depend to a considerable degree on support from its large neighbour and top world exporter Saudi Arabia; Bahrain relies on output from an oil field shared with Saudi Arabia for some 70 per cent of its budget revenue.

In the wake of last year's unrest, Bahrain received an aid pledge of $10 billion spread over 10 years from its wealthier Gulf neighbours, but in June this year it said it had not received any of that money so far, and it is unclear exactly when the funds will start to flow.

Maraj said the government had identified infrastructure, housing and health care projects that would be funded by this aid money, and that some of the projects had entered the tendering stage.-Reuters